Occasionally, a Virginia equitable distribution case has a fact pattern so unusual that you are grateful it was appealed and generated a clearly reasoned, published opinion. Such a case is Layman v. Layman, decided on June 11, 2013.
I will make the facts simple: During a 58-year marriage, husband mortgages his separate real property to purchase jointly owned marital real property. During the marriage, the parties pay off this mortgage on husband’s separate property using marital funds. Husband properly traces these transactions.
The question on appeal is whether the separate property becomes transmuted into marital property, on the theory that “discharge of a debt secured by an asset that results in an increase in equity in the asset constitutes an ‘increase in value.’” Gilman v. Gilman, 32 Va. App. 104, 119, 526 S.E.2d 763, 770 (2000) (quoting Code § 20-107.3(A)(1)). In other words, did paying back the separate loan increase the equity in the separate real estate?
The answer is “No.” The Court of Appeals states the rule in this way: “[T]he discharge of an encumbrance using marital funds generates martial equity only in the encumbered property that was acquired using the proceeds of the loan.” More concisely stated, borrowing and paying back changes nothing. For property to change characterization for purposes of equitable distribution, you need to borrow from separate, buy something new that is separate, and pay down the new separate with marital funds. That did not happen here.
The opinion makes perfect sense. If I lend you a dollar that belongs to me alone and we put it in an account that belongs to both of us, and then we pay it back out of money that belongs to both of us, you do not suddenly own part of my money. We’re square; our transaction is zeroed out. There is no increase in my separate equity. The dollar I got back is exactly the amount that I lent us. End of story.